If you want to refinance your student loan debt, it’s a good idea to calculate and understand your debt-to-income ratio before you apply.

When you’re refinancing any type of loan, one of the things a bank or credit union considers is your debt-to-income ratio. While all lenders have their own standards, a debt-to-income ratio of 40 percent or more, could be a sign of financial stress, according to the Federal Reserve. That could end your chances of being approved

What is a debt-to-income ratio?

A debt-to-income ratio is the percentage of your gross income you use to pay your debts. These payments might include rent, mortgage, credit cards, auto loans, personal loans, student loans, alimony, child support, or any other outstanding debt you may have.

To understand how to calculate debt to income ratio, add up your monthly debt payments and divide the number by your gross monthly income. For example, if you pay $1,000 a month for rent, $125 on a credit card, $400 for your car note and $350 for your student loan. Let’s also say your monthly gross income is $3,500.

A high debt-to-income ratio means a lot of your income is consumed by your debt, leaving little left in your budget to cover expenses like utilities, fuel, and groceries, which are not included in the ratio.

Typically, the maximum student loan refinancing debt-to-income ratio lenders will approve is 50 percent. If your ratio is too high, like our example, you may not qualify for student loan refinancing. The lower your number, the better.

How can you improve your debt-to-income ratio if you’re not approved for refinancing?

If you want to refinance your student loan debt, but your debt-to-income ratio is too high, you can take steps to improve your situation.

“Reduce your current expenses in the short term, lower your debt or expenses by making changes that may take more time to implement, or raise your income,” suggested certified financial planner Sean M. Pearson with Ameriprise Financial Services in Conshohocken, Pa. “Big improvements can be difficult, especially in the short run. The last two options take more time but may be more impactful in the long run.”

While the debt-to-income ratio calculation is straightforward, there are nuances to debt payments you should make in order to positively affect your ratio, said Ben Simiskey, a certified financial planner with Cornelius Stegent & Price LLP Certified Public Accountants in Houston, Texas.

“You should focus on paying off a debt entirely,” he says.

For example, if you had $2,000 to allocate to debt payments, your ratio would improve more if you paid off a $2,000 credit card than if you paid $500 each on three credit cards and an auto loan, Simiskey explains.

“You want to try to get rid of a payment altogether,” he said. “If you can't pay off a full balance right away, I would focus on paying your minimum payments and dedicating any extra discretionary money to your lowest outstanding balance until it's paid off. Then move the discretionary money plus the minimum amount that you no longer have to pay on that balance to the next lower balance. And so on.”

Pearson said budgets are meant to be a lifestyle rather than something you turn on and off. Taking time to lower your debt-to-income ratio will not only help you qualify for student loan refinancing; it may serve you if you wish to buy a house or finance another large purchase.

“Often the small changes that accumulate over time are more impactful than trying to make a big splash right away,” said Pearson.